Edited version of your private ruling

Authorisation Number: 1012572123234

Ruling

Subject: Equity Plans

Question 1

Will the Company obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), in respect of the irretrievable cash contributions made by the Company to the Trustee of the Company Employee Share Trust (EST) to fund the subscription for or acquisition on-market of Company shares by the EST?

Answer

Yes

Question 2

Will the Company obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred in relation to:

(a) the establishment and implementation of the EST, and

(b) the on-going administration of the EST?

Answer

(a) No

(b) Yes

Question 3

Are irretrievable cash contributions made by the Company to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company shares by the EST, deductible to the Company at the time determined by section 83A-210 of the ITAA 1997?

Answer

Yes

Question 4

If the EST satisfies the relevant Company Equity Plan obligation by subscribing for new shares in the Company, will the subscription proceeds be included in the assessable income of the Company under sections 6-5 or 20-20 of the ITAA 1997 or trigger a CGT event under Division 104 of the ITAA 1997?

Answer

No

Question 5

Will the Commissioner seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the Company in respect of the irretrievable contributions made by the Company to the Trustee of the EST to fund the subscription for or acquisition on-market of the company's shares by the EST?

Answer

No

Question 6

Is the provision of Performance Rights, Unlisted Options or shares in the company to the Company employees under a Company Equity Plan a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986?

Answer

No

Question 7

Will the irretrievable cash contributions made by the Company to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company shares, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA 1986?

Answer

No

Question 8

Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to the Company, by the amount of tax benefit gained from irretrievable cash contributions made by the Company to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company shares?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 31 March 2014 (FBT)

Year ended 31 March 2015 (FBT)

Year ended 31 March 2016 (FBT)

Year ended 31 March 2017 (FBT)

Year ended 31 March 2018 (FBT)

The scheme commences on:

1 April 2013

Relevant facts and circumstances

The Company conducts a business in Australia and engages employees.

The Company has introduced the Company Equity Plans, consisting of two types of equity incentives:

· Performance Rights, and

· Unlisted Options.

The Company has adopted the Employee Incentive Plan (EIP) to formalise the structure for the granting of Performance Rights.

Unlisted Options have been provided in accordance with the company's constitution.

The Company Employee Share Trust (EST) was established to facilitate the provision of Company shares under current and future incentive plans. The EST will be managed by the Trustee and governed by the Trust Deed.

The stated key purpose of each of the Company Equity Plans is to:

· Offer a share / equity-based bonus to employees;

· Focus employees on the Company's strategic performance targets; and

· Recognise and reward employees for creating superior value for shareholders through their individual performance.

While the plans allow for provision of rights and options to employees (and associates of employees) of group companies, the applicant has stated that the rulee only contemplates providing rights and options to employees (and associates of employees) of the Company.

Employee Performance Rights Plan (EPRP)

The key features of the EPRP are as follows:

· At the Board's absolute discretion, it may grant Performance Rights to employees or associates of employees.

· A Performance Right is a conditional right to acquire one fully paid ordinary share in the Company granted under the plan.

· No payment is required by the employee / associate on grant of the Performance Rights, unless the Board otherwise determines. No payment or exercise price is required once the rights vest.

· The Board grants Performance Rights by deed. The Board determines the terms of the Performance Right

· 'Vesting' means an employee becomes entitled to have the shares subject to a Performance Right transferred to him or her.

· Before vesting, the employee has no right to vote or receive dividends or to participate in any new issue of securities as a result of holding their Performance Rights.

· Satisfaction of the performance criteria is assessed by the Company Board after the end of the relevant performance period. The vesting dates for the Performance Rights are spread over a three year period.

· The Company Board has absolute discretion to cause a Performance Right to lapse where a participant:

· requests for the rights to lapse

· transfers, assigns or otherwise disposes of the rights

· participates in fraudulent and dishonest behaviour

· ceases employment with the Company, or

· was an associate but is no longer an associate of an employee.

· However, the Company Board may decide that a Performance Right does not lapse if the employee's employment with the Company is terminated due to ill health, injury or disability, the employing company ceases to be under the control of the Company, death or any other reason if the Board so decides in any particular case. The Board also has absolute discretion to decide that any unvested Performance Rights will vest immediately on an employee's termination date.

· A Performance Right will also lapse if, at the end of the relevant performance period, the performance conditions are not satisfied.

· Subject to the employee's continued employment until the vesting date, where the Board determines that any performance condition has been satisfied or waived during the performance period, the employer will, within 30 days of vesting, arrange for the transfer or issue to the employee (or associate) of the shares.

· The Company EST intends to acquire shares to satisfy the Performance Rights at or about the same time that the rights vest.

Employee Incentive Plan (EIP)
The Board has resolved to adopt the EIP. The key features of the EIP are as follows:

· All permanent salaried employees of the Company, who commenced employment prior to a certain date, are eligible to participate in the EIP, except for the Chief Executive and General Managers of the company. Contractors, consultants and temporary personnel are not eligible to participate.

· Employees would only be invited to participate in the EIP if the Company Board determined that the Company achieved the necessary corporate performance rating, and the Chief Executive of the Company ratified, after moderation by the Executive Leadership Team of the Company, that the eligible employee had achieved an individual performance rating that met a certain level.

· If an employee accepts an offer to participate in the ElP, the Company will grant the employee with Performance Rights under the EPRP, which are subject to vesting conditions which have been determined under the terms of the EIP. Under the ElP, the Performance Rights will only vest if the employee is employed by the Company at the vesting date.

· Offers to participate will be made where the employer achieves the corporate performance rating AND the eligible employee achieves a sufficient individual performance rating. The number of rights offered is calculated using a formula based on the performance ratings, the employee's salary and the percentage of days employed during the year.

· No payment is required by the employees on grant of the Performance Rights. When a vesting condition is satisfied, the employee will be entitled to receive one fully paid ordinary share in the Company for each right vested, without any further payment or consideration.

· Some of the Performance Rights granted to the employee will vest immediately on grant, and the remaining rights will vest approximately two years after the grant date.

· If an employee ceases to be employed by the Company before the vesting date, the Performance Right will lapse, unless otherwise determined by the Company Board.

· The Company Board also has discretion to cause a Performance Right to lapse if the employee participates in fraudulent and dishonest behaviour, transfers, assigns or otherwise disposes of the right or requests for the rights to lapse.

· The Company Board may decide that a Performance Right does not lapse if the employee's employment with the Company is terminated due to ill health, injury or disability; the employing company ceases to be under the control of the Company, or death.

· The Company EST intends to acquire shares to satisfy the Performance Rights under the EIP at or about the same time that the rights vest.

Unlisted Options

Unlisted Options are not issued under any specific "employee option plan". Rather, in accordance with the Company Constitution, the Board has the power to issue unlisted options to certain key employees and associates of the company, for the purpose of providing them with equity based incentives in the company and focusing them on achieving the strategic performance targets of the company.

The key features of Unlisted Options are as follows:

· It is at the Board's discretion to invite certain employees and associates (including contractors) of the Company to apply for a number of Unlisted Options specified on the invitation / offer document.

· The number of Unlisted Options made available to the employee / associate is determined at the Board's discretion and depends on various factors such as their position in the company or the relationship they have with the company.

· The conditions which must be satisfied in order for the Unlisted Options to vest and the vesting period for each tranche of unlisted options issued by the company are determined at the Board's discretion and depend on various factors such as their position in / relationship with the company. The vesting condition which generally applies to all Unlisted Options issued to date is a retention period with the company of at least one year from the issue date. The majority of Unlisted Options vest over a period of three or four years from the issue date.

· The EST intends to acquire shares to satisfy the Unlisted Options at or about the same time that the Unlisted Options are exercised.

· Each Unlisted Option entitles the holder to subscribe for and be allotted one fully paid ordinary share in the Company.

· The Unlisted Options are not transferable and during the period of time in which an employee / associate holds an Unlisted Option and prior to it vesting or being exercised, the employee / associate is not entitled to participate in any new issue of securities in the Company as a result of their holding of the Unlisted Options.

The applicant has submitted with the ruling application an example of the key terms and conditions of Unlisted Options currently on issue. The terms and conditions include:

· Exercise price

· Expiry date

· Vesting date/s (example up to three years from issue)

· Lapse on expiry date, resignation or termination with cause

· No lapse on termination without cause

· Not transferrable

· Shares issued within 10 days of exercise

· Shares rank pari passu in all respects with other shares

· No participation rights for option holders

Operation of the Company EST

· The Company established the Company Employee Share Trust (EST) for the purpose of managing its incentive plans (current and future) and delivering shares under these incentive plans. The Trustee is an unrelated third party.

· The stated purpose of the EST is to acquire shares and/or subscribe for newly issued shares in the Company for past and future offers of Performance Rights and Unlisted Options for delivery to the Company employees under the Company Equity Plans.

· The Trustee has the full power to do all things a trustee is permitted to do by law in respect of the EST, the trust shares and the trust assets.

· It is intended that the EST will be managed and administered so that it satisfies the definition of 'employee share trust' in subsection 130-85(4) of the ITAA 1997.

· Pursuant to the Trust Deed, the Trustee will deal with trust assets in accordance with the directions of the Company under the terms of the Trust Deed, and subject to any inconsistency with the terms of the Trust Deed:

· to the extent the relevant shares are Allocated Shares, the directions of the relevant Participant

· the terms of the relevant Plan Rules, and/or

· the relevant Terms of Participation,

except where it would be required to incur a cost, expense or liability in so doing for which it is not fully indemnified.

· The Trustee is not permitted to carry out activities that are not matters or things which are necessary or expedient to administer and maintain the EST. In addition, it will not be permitted to carry out activities which result in the participants in the Company Equity Plans being provided with additional benefits other than the benefits that arise from the relevant plan rules.

· Pursuant to the Trust Deed, the Board will instruct the Trustee, by way of notice in writing, to purchase, subscribe for or allocate the requisite number of shares in the Company specified in the notice.

· Pursuant to the Trust Deed, the Board must provide the necessary funds to the Trustee for the purpose of enabling it to acquire shares as specified in the notice in accordance with the Trust Deed (after application of any capital).

· The Trustee will, in accordance with instructions received pursuant to the relevant plan rules in place at the time, purchase, subscribe and allocate shares.

· The subscription price for each of the shares must be the market value of the shares on the date on which the shares are issued to the Trustee.

· The Trustee (or any other party which the Trustee considers appropriate) will establish and maintain a separate Trust Share Account or record in respect of each participant in accordance with the Trust Deed.

· While Allocated shares are held in trust, the participant will be entitled to dividend and voting rights. By written notice, participants can apply for legal title to the shares held in the EST to be transferred to them or to a third party.

· The contributions by the Company to the Trustee of the EST are not refundable to the Company. They may however be applied by the Trustee to a subscription for shares in the Company pursuant to the Trust Deed.

The applicant has stated that the amount of each cash contribution to be made by the Company to the EST will broadly equal the fair market value of shares to be acquired by the EST at that time. Further, the EST will generally acquire shares to satisfy the EPRP, EIP and Unlisted Options at or about the same time that the awards vest.

The applicant has stated that the Trustee of the EST holds all Company shares pursuant to each of the Company Equity Plans on capital account for income tax purposes.

The applicant has stated that the establishment of the EST provides the Company greater flexibility to accommodate the long term incentive arrangements of the company. Similarly, it allows for a streamlined approach to the administration aspect of the equity plans. The Company EST can also be used to provide a range of incentives involving shares in the Company as circumstances change in the labour market that require different incentives to be provided in order to attract, reward and retain key executives and employees.

In summary, the applicant has stated that the commercial benefits of using an EST include:

· Assisting the company with its capital management, as the Company can direct the EST to use the contributions received to either acquire shares on-market, which will prevent the dilution of interests held by existing Shareholders or alternatively to subscribe for new shares in the Company.

· Providing an arm's-length vehicle through which shares in the Company can be acquired and held in the company on behalf of the relevant employee. This assists the Company to satisfy corporations' law requirements relating to a company dealing in their own shares.

· Allows for greater flexibility for the Company to accommodate its long term incentive arrangements both now and into the future, as the company continues to grow and expand its operations and as a result, its employee numbers.

Cost Incurred by the Company to Administer the EST

the Company will incur various costs in relation to the establishment and implementation of the EST, including but not limited to:

· taxation and legal advice obtained in respect of the Australian tax and legal implications which may arise for both the Company and the participants of the relevant Company Equity Plans in respect of the EST structure

· legal advice obtained in respect of whether any changes are required to the Company Equity Plans in order to accommodate the EST structure

· legal drafting fees in respect of the various documentation required (including the EST Trust Deed)

· professional costs associated with the establishment of the legal structure of the EST, establishment of trust compliance processes and the establishment of a bank account for the EST etc

· professional costs associated with the creation and registration of the EST with various authorities, and

· professional costs associated with the drafting and lodgement of the Private Binding Ruling application with the ATO.

the Company will also incur costs associated with the services provided by the Trustee of the EST in respect of the on-going administration and management of the EST, including but not limited to:

· costs incurred in the acquisition of shares on-market (e.g. brokerage costs and the allocation of shares to participants)

· employee plan record keeping

· production and dispatch of holding statements to employees

· provision of annual income tax return information for employees

· management of employee termination, and

· other Trustee expenses including the annual audit of the financial statements and annual income tax return of the EST.

Relevant legislative provisions

Income Tax Assessment Act 1997 - section 8-1

Income Tax Assessment Act 1997 - section 83A-10

Income Tax Assessment Act 1997 - section 83A-210

Income Tax Assessment Act 1997 - section 6-5

Income Tax Assessment Act 1997 - section 20-20

Income Tax Assessment Act 1997 - section 102-5

Income Tax Assessment Act 1997 - section 102-25

Income Tax Assessment Act 1997 - section 104-35

Income Tax Assessment Act 1997 - section 104-155

Income Tax Assessment Act 1936 - section 177F

Income Tax Assessment Act 1936 - section 177A

Income Tax Assessment Act 1936 - section 177C

Income Tax Assessment Act 1936 - section 177D

Income Tax Assessment Act 1997 - section 995-1

Fringe Benefits Tax Assessment Act 1986 - subsection 136(1)

Income Tax Assessment Act 1997 - subsection 130-85(4)

Fringe Benefits Tax Assessment Act 1986 - section 67

Reasons for decision

Question 1

Summary

The Company can claim an income tax deduction pursuant to 8-1 of the ITAA 1997 in respect of the irretrievable contributions made to the Trustee of the EST to fund the subscription for or acquisition on-market of Company shares by the EST.

Detailed reasoning

Section 8-1 of the ITAA 1997, insofar as it is relevant, states:

8-1(1)

You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a ^*business for the purpose of gaining or producing your assessable income.

8-1(2)

However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature…

Where an employer such as the Company carries on a business for the purpose of gaining or producing assessable income, the question arises as to whether a contribution made to the trustee of a trust such as the EST is necessarily incurred in carrying on its business so as to satisfy the second limb. To satisfy paragraph (b) there must be a relevant connection between the loss or outgoing and the business.

To qualify for a deduction under section 8-1 of the ITAA 1997 a contribution to the trustee of an EST must be incurred.

While 'incurred' generally refers to a situation where a taxpayer owes a present money debt that they cannot escape (Taxation Ruling TR 97/7), in relation to a contribution made to the trustee of a trust such as the EST, an amount is only incurred when the ownership of that contribution passes from an employer to the trustee of the trust and there is no circumstance in which the employer can retrieve any of the contribution (Pridecraft Pty Ltd v. Federal Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001; Spotlight Stores Pty Ltd v. Commissioner of Taxation [2004] FCA 650; 2004 ATC 4674; 55ATR 745).

The contributions made by the Company to the Trustee of the EST to fund the subscription for or acquisition on-market of Company shares by the EST are irretrievable and non-refundable under the Trust Deed, which does not provide for any circumstances in which the Company can retrieve the contribution other than via subscription for shares pursuant to clause x of the Trust Deed.

In carrying on a business

Further, to be deductible under the second limb of section 8-1 of the ITAA 1997, a contribution must have been necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

An expense will have the relevant connection to the business when it is 'desirable or appropriate in the pursuit of the business ends of the business' (Ronpibon Tin NL and Tongkah Compound NL v. FC of T (1949) 78 CLR 47 at 55-58; [1949] HCA 15 at [9]-[15] (Ronpibon); Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation [1980] FCA 150; 80 ATC 4542 at 4559-4561; (1980) 11 ATR 276 at 294-297 (Magna Alloys)).

It is considered that the cash contributions made by the Company to the Trustee of the EST under the scheme specified in this ruling are necessarily incurred in carrying on the Company's business for the purpose of producing its assessable income because:

· the Company carries on a business in Australia, and engages employees in that business

· the Company will make irretrievable contributions to the EST at or about the same time that the time rights vest and options are exercised, and

· At the time the Company makes contributions to the EST, the primary purpose of the contribution is for it to be applied, almost immediately, to the direct provision of remuneration of employees of the Company (jn the form of equity based incentives).

The irretrievable contributions the Company makes to the Trustee under the rules of the plans are directed to remunerating employees. Given these facts, it is considered that the contributions satisfy the nexus of being necessarily incurred in carrying on the Company business. Accordingly, the conditions of paragraph 8-1(1)(b) of the ITAA 1997 are satisfied.

Capital or of a capital nature

Even where a contribution is deductible because it satisfies the nexus with a business being carried on for the purpose of gaining or producing assessable income, it may still be capital or of a capital nature. The contribution will not be deductible to the employer to the extent to which it is capital or of a capital nature.

The decision in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337 (Sun Newspapers) is a leading authority on the distinction between revenue and capital expenditure, where his Honour said at 363:

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.

More recently in GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 21 ATR 1; 90 ATC 4413 the High Court pointed out that the character of expenditure is ordinarily determined by reference to the nature of the asset acquired and that the character of the advantage sought by the making of the expenditure is a critical factor in determining the character of what is paid.

One of the advantages sought by the Company in making contributions to the EST under the Company Equity Plans would include the incentivising of employees to perform effectively and contribute to the business of the Company.

Other advantages obtained could include that which flows to the Company from enlarging its own equity structure when the Trustee of the EST acquires the Company equity interests in the form of shares from the Company. As this advantage is structural and enduring, it would be of a capital nature.

The combined operation of subsections 8-1(1) and 8-1(2) of the ITAA 1997 may require apportionment of a loss or outgoing into deductible and non-deductible components, where a single loss or outgoing is incurred for more than one purpose or on items of a differing nature.

However, where a contribution is made for the purpose of securing for the employer advantages of both a revenue and capital nature, but the advantages of a capital nature are only expected to be very small or trifling by comparison, apportionment may not be required.

Where the primary purpose of the employer in making the contribution is to remunerate employees within a relatively short period of the contribution being made, it is considered that any amount of the contribution attributable to securing a capital structure advantage will only be very small or trifling where it is intended that:

· any direct interest in the employer acquired by the trustee of the EST (for example shares) will be transferred to employees within that relatively short period, and

· such shares will not be on-sold to third parties at that time or shortly thereafter.

Under the Company Equity Plans, we consider that any capital advantage will be very small or trifling as:

· the Company will make contributions to the plan with the intention that it be applied by the Trustee of the EST directly, as a reward for services provided by employees;

· Contributions will be made of an amount that will broadly equal the fair market value of shares to be acquired at that time.

· Contributions will be made at or about the same time as when rights vest. Contributions will be immediately applied by the EST to acquire shares and these shares will be transferred or issued to the employee/associate within 30 days of the Performance Rights vesting .

· the Company intends that the shares acquired by the employees will be held by the employees and will not be on-sold to third parties at the time of transfer or shortly thereafter. This is consistent with the overall stated key purpose of the plans, which is to:

· Offer a share / equity-based bonus to employees;

· Focus employees on the Company's strategic performance targets; and

· Recognise and reward employees for creating superior value for shareholders through their individual performance.

Therefore, apportionment for the capital advantage will not be required.

Accordingly, the irretrievable cash contributions the Company makes to the Trustee to enable it to acquire shares, whether by on-market purchase or subscription, are allowable deductions.

Question 2

Summary

The Company will obtain an income tax deduction pursuant to section 8-1 of the ITAA 1997 for costs incurred in relation to the ongoing administration and management of the EST.

The Company will not obtain an income tax deduction pursuant to section 8-1 of the ITAA 1997 for costs incurred to establish and implement the EST as the costs are capital in nature.

Detailed reasoning

As discussed at Question one, you can deduct an amount under section 8-1 of the ITAA 1997 if the expense is incurred in gaining or producing assessable income, or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

In respect of costs in administering an employee share trust, ATO Interpretative Decision ATO ID 2002/961 provides that costs incurred in implementing and administering an employee share scheme will be deductible under section 8-1 of the ITAA 1997 as they are part of the ordinary employee remuneration costs. The facts in ATO ID 2002/961 reveal that the deductible costs include brokerage fees, audit fees, bank charges and other ongoing administrative expenses necessarily incurred in running the scheme.

The Company incurs various costs in relation to the implementation and on-going administration of the EST. For example, the Company will incur costs associated with the services provided by the EST, including but not limited to:

· costs incurred in the acquisition of shares on-market (e.g. brokerage costs and the allocation of shares to participants)

· employee plan record keeping

· production and dispatch of holding statements to employees

· provision of annual income tax return information for employees

· management of employee termination, and

· other trustee expenses including the annual audit of the financial statements and annual income tax return of the EST.

These expenses form part of ordinary employee remuneration costs. The costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses. Accordingly the costs are deductible under section 8-1 of the ITAA 1997 in the year they are incurred.

The Company also incurred costs to establish and implement the EST, including but not limited to:

· taxation and legal advice obtained in respect of the Australian tax and legal implications which may arise for both the Company and the participants of the relevant Company Equity Plans in respect of the EST structure

· legal advice obtained in respect of whether any changes are required to the Company Equity Plans in order to accommodate the EST structure

· legal drafting fees in respect of the various documentation required (including the EST Trust Deed)

· professional costs associated with the establishment of the legal structure of the EST, establishment of trust compliance processes and the establishment of a bank account for the EST etc

· professional costs associated with the creation and registration of the EST with various authorities, and

· professional costs associated with the drafting and lodgement of the private ruling application with the ATO.

It is accepted that these costs are incurred in carrying on a business for the purpose of gaining or producing assessable income and therefore meet the requirements of subsection 8-1(1) of the ITAA 1997. To be deductible under section 8-1 however, it needs to be established that the outgoing is not one of capital, or of a capital nature.

The decision in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337 (Sun Newspapers) is a leading authority on the distinction between revenue and capital expenditure, where his Honour said at 363:

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.

More recently in GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 21 ATR 1; 90 ATC 4413 the High Court pointed out that the character of expenditure is ordinarily determined by reference to the nature of the asset acquired and that the character of the advantage sought by the making of the expenditure is a critical factor in determining the character of what is paid.

The character of the advantage sought by the Company in establishing the EST can be gleaned from the private ruling application where it was stated:

The establishment of the EST provides the Company greater flexibility to accommodate the long term incentive arrangements of the company. Similarly, it allows for a streamlined approach to the administration aspect of the equity plans. The Company EST can also be used to provide a range of incentives involving shares in the Company as circumstances change in the labour market that require different incentives to be provided in order to attract, reward and retain key executives and employees.

Also cited in the private ruling application were three commercial benefits of using the EST.

It can be seen that the intended effect of establishing the EST, from a practical business point of view, was to establish a structure whereby, in the long term, the Company can accommodate its incentive arrangements, while assisting with capital management. While the Company already had established Performance Rights plans in place, the EST provides additional benefits long term, which will assist in managing its share capital. The advantage sought is structural and enduring.

In this matter, the costs incurred by the Company under the heading of 'establish and implement' are effectively once and for all payments referrable to implementing the EST. The costs cannot be said to be regular outlays directed at obtaining regular returns.

Question 3

Summary

The provision of money to the EST to acquire Company shares is considered to be for the purpose of enabling the participating employees to acquire the Performance Rights or Unlisted Options. If that money is provided before the rights or options are acquired then section 83A-210 of the ITAA 1997 will apply. However, section 83A-210 of the ITAA 1997 will not apply to a deduction for the purchase of shares to satisfy the obligation arising from Performance Rights or Unlisted Options already granted, and that deduction is accordingly allowable to the Company in the year in which the money was paid to the EST, under section 8-1 of the ITAA 1997.

Therefore, the Company will be allowed a deduction for contributions made to the EST in the year of income in which they are made, provided and to the extent that they are in respect of the funding of the acquisition of shares to satisfy the obligations in relation to Performance Rights and Unlisted Options granted to participants in that income year or earlier income years.

However, if any amount of money is used by the EST to purchase excess shares intended to meet a future obligation arising from a future grant of Performance Rights or Unlisted Options, the excess payment occurs before the employees acquire the relevant Performance Rights or Unlisted Options (ESS interests) under the scheme. Section 83A-210 of the ITAA 1997 will apply in that case and the excess payment will only be deductible to the Company in the year of income when the relevant rights or options are subsequently granted to the employees.

Detailed reasoning

As discussed in Question 1, the provision of money to the Trustee of the EST by the Company for the purpose of remunerating its employees under the Company Equity Plans is an outgoing in carrying on the employer's business and is deductible under section 8-1 of the ITAA 1997.

The deduction under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which the employer incurred the outgoing, but under certain circumstances the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997.

Section 83A-210 of the ITAA 1997 determines the timing of a deduction for contributions, as follows:

83A-210 If:

(a) at a particular time, you provide another entity with money or other property:

(i) under an arrangement; and

(ii) for the purposes of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an ESS interest under an employee share scheme in relation to the ultimate beneficiary's employment (including past or prospective employment); and

(b) that particular time occurs before the time (the acquisition time) the ultimate beneficiary acquires the ESS interest;

then, for the purposes of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time.

Section 83A-210 of the ITAA 1997 will only apply if there is a relevant connection between the money provided to the EST, and the acquisition of ESS interests (directly or indirectly) by the Company employees under the EIP or the Unlisted Options, in relation to the employee's employment.

An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company.

Under the Company Equity Plans a Performance Right or Unlisted Option granted to an employee will be an ESS interest as it is a right to acquire a beneficial interest in a share in the Company. This ESS interest is granted under an ESS in relation to the employee's employment. The share acquired by the Trustee of the EST to satisfy such a right or option is granted under the ESS to an employee, in relation to the employee's employment.

The granting of the beneficial interests in the Performance Rights or Unlisted Options, the provision of the money to the Trustee of the EST under the arrangement, the acquisition of the shares by the Trustee of the EST and the allocation of shares to the participating employees are all interrelated components of the EPRP, EIP and the Unlisted Options. All the components of the scheme must be carried out so that the scheme can operate as intended.

As one of those components, the provision of money to the Trustee of the EST necessarily allows the scheme to proceed. Consequently, the provision of money to the Trustee of the EST to acquire Company shares is considered to be for the purpose of enabling the participating employees, indirectly as part of the EPRP, EIP and the Unlisted Options, to acquire the Performance Rights or Unlisted Options. If that money is provided before the Performance Rights or Unlisted Options are acquired, then section 83A-210 of the ITAA 1997 will apply. However, section 83A-210 of the ITAA 1997 will not apply to a deduction for the purchase of shares to satisfy the obligation arising from Performance Rights or Unlisted Options already granted, and that deduction is accordingly allowable to the Company in the year in which the money was paid to the Trustee of the EST, under section 8-1 of the ITAA 1997.

However, if any amount of money is used by the Trustee of the EST to purchase excess shares intended to meet a future obligation arising from a future grant of Performance Rights or Unlisted Options, the excess payment occurs before the employees acquire the relevant Performance Rights or Unlisted Options (ESS interests) under the scheme. Section 83A-210 of the ITAA 1997 will apply in that case and the excess payment will only be deductible to the Company in the year of income when the relevant rights or options are subsequently granted to the employees.

Question 4

Summary

If the Trust satisfies its obligations under the relevant Company Equity Plan by subscribing for new shares in the Company, the subscription proceeds will not be included in the assessable income of the Company under sections 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax event under Division 104 of the ITAA 1997.

Detailed reasoning

Section 6-5 Income according to ordinary concepts

Under subsection 6-5(1) of the ITAA 1997, a payment or other benefit received by a taxpayer is included in assessable income if it is income according to ordinary concepts. Income according to ordinary concepts is not defined in the income tax legislation. However, principles to determine whether a receipt is income according to ordinary concepts have been developed by case law. In determining whether a receipt is income according to ordinary concepts, it is necessary to apply the relevant principles developed by case law to the facts of the particular case.

As discussed above in relation to Question 1, Dixon J in Sun Newspapers outlined the three matters to be considered in determining whether a payment is on capital or revenue account, as follows:

· the character of the advantage sought by the payment

· the way it is to be used or enjoyed, and

· the means adopted to obtain it.

As stated previously in this ruling, the Company has established the Company Equity Plans as part of its remuneration policy with the intention of recognising and rewarding employees for performance and attracting and retaining high performing employees.

The act of subscribing for Company shares by the Trustee of the EST is governed by the Trust Deed and any directions received from the Company (either acquire shares on-market or subscribe for shares). Notwithstanding that the Trustee's subscription for shares relates to the satisfaction of obligations under the plan rules, the subscription for shares is part of the Company's capital management strategy.

Further, the receipt of the subscription will be accounted for as an addition to the share capital of the Company in its books and records. While this treatment of the subscription proceeds is not decisive in itself, it is indicative of the Company's treatment of the receipt and consistent with accounting principles.

Based on the above, the subscription proceeds are capital receipts.

Section 20-20 Assessable recoupments

Under Subdivision 20-A of the ITAA 1997, certain amounts received by way of insurance, indemnity or other recoupment are assessable income if the amounts are not income under ordinary concepts or otherwise assessable.

Under subsection 20-20(2) of the ITAA 1997, an amount you have received as recoupment of a loss or outgoing is an assessable recoupment if:

(a) you received the amount by way of insurance or indemnity; and

(b) you can deduct an amount for the loss or outgoing for the *current year, or you have deducted or can deduct an amount for the loss or outgoing for an earlier income year under any provision of this Act.

The subscriptions received by the Company from the EST are for shares and are integral to the arrangement whereby the acquisition and holding of the shares by the Trustee and the allocation of shares to the participating employees are all interrelated components of the Company Equity Plans. The character of the subscriptions paid to the Company for shares is not one of 'insurance, indemnity or other recoupment'.

Division 104 CGT events

Subsection 102-5(1) of the ITAA 1997 provides that your assessable income includes your net capital gain for the income year. Given that a capital gain or capital loss is made only if a CGT event happens, the initial step is to ascertain whether such an event has occurred. As the transaction is the payment of subscription proceeds by the Trust to the Company for shares, the possible CGT events are:

· D1 - Creating contractual or other rights; or

· H2 - Receipt for event relating to a CGT asset.

Subsection 102-25(3) of the ITAA 1997 provides that CGT event D1 should be considered before CGT event H2.

Subsection 104-35(1) states that CGT event D1 'happens if you create a contractual right or other legal or equitable right in another entity'. However, the legal or equitable right has been created at the time of the issuance of the options or rights and not upon the payment of the subscription proceeds to the Company.

As no legal or equitable right is created CGT event D1 does not happen. Furthermore, paragraph 104-35(5)(c) of the ITAA 1997 states that event D1 does not happen where a company issues or allots equity interests in the company.

As CGT event D1 is excluded, CGT event H2 is to be considered. CGT event H2 happens if an act, transaction or event occurs to a CGT asset owned by a taxpayer and the occurrence does not result in an adjustment to the cost base or reduced cost base (subsection 104-155(1) of the ITAA 1997).

Again, consideration of the subscription proceeds received by the Company from the EST establishes that they are for shares and are integral to the arrangement whereby the acquisition and holding of the shares by the trustee and the allocation of shares to the participating employees are all interrelated components of the relevant Company Equity Plans. As part of the relevant plans contractual rights of employees are exercised on their behalf to acquire shares in the Company, rather than an act, transaction or event relating to a CGT asset owned by the Company.

Paragraph 104-155(5)(c) of the ITAA 1997 provides that CGT event H2 does not happen where a company issues or allots equity interests in the company, which is applicable here.

Accordingly, a CGT event under Division 104 of the ITAA 1997 does not arise when the Trustee subscribes for shares in the capital of the Company.

Question 5

Summary

A consideration of all the factors referred to in subsection 177D(2) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is to provide remuneration to the Company's employees who participate in the scheme in a form that promotes the company's business objectives, rather than to obtain a tax benefit.

Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the Company in relation to irretrievable contributions made by the Company to the EST to fund the acquisition of shares in accordance with the scheme.

Question 6

Summary

The provision of rights, options or shares by the Company to its employees under the Company Equity Plans are not fringe benefits within the meaning of subsection 136(1) of the FBTAA.

Detailed reasoning

A fringe benefit is defined in subsection 136(1) of the FBTAA as follows:

"fringe benefit", in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax;

being a benefit provided to the employee or to an associate of the employee by:

(c) the employer; or

(d) an associate of the employer; or

(e) a person (in this paragraph referred to as the "arranger") other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:

(i) the employer or an associate of the employer; and

(ii) the arranger or another person; or

(ea) a person other than the employer or an associate of the employer, of the employer or an associate of the employer:

(i) participates in or facilitates the provision or receipt of the benefit; or

(ii) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit;

and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

in respect of the employment of the employee, but does not include:…

Paragraphs (f) to (r) of the definition of fringe benefit contain a number of exclusions from this definition. Paragraph (h) of the definition of a fringe benefit contained in subsection 136(1) of the FBTAA specifically excludes from the definition of a fringe benefit:

A benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997) to which subdivision 83A-B or 83A-C of that Act applies;

An ESS interest in a company is a beneficial interest in a share in the company, or a beneficial interest in a right to acquire a beneficial interest in a share in the company (subsection 83A-10(1) of the ITAA 1997). An employee share scheme is a scheme under which ESS interests in the company are provided to employees (or associates of employees) of the company or subsidiaries of the company, in relation to the employee's employment. (Subsection 83A-10(2) of the ITAA 1997)

The Company's employees will receive beneficial interests in Performance Rights or Unlisted Options to acquire beneficial interests in shares in respect of their employment, upon acceptance of participation in the plans in accordance with the relevant Company Equity Plans.

The Commissioner accepts that the scheme described in the facts is an employee share scheme under which relevant ESS interests (being beneficial interests in rights and options to acquire shares) are acquired by employees of the Company (or 'associates of those employees'), and the acquisition of those ESS interests are in relation to the employment of those employees. Therefore, the provision of those rights will not be subject to fringe benefits tax because they are specifically excluded from the definition of fringe benefit.

The shares acquired by the Trustee under the relevant Company Equity Plans to satisfy the rights are also provided to employees under that same employee share scheme.

However shares granted to employees under the plans to satisfy the Performance Rights and Unlisted Options acquired on acceptance of participation in those plans are not ESS interests acquired under an employee share scheme to which Subdivision 83A-B or 83A-C of the ITAA 1997 apply (see subsection 83A-20(2) of the ITAA 1997 and paragraph 83A-105(1)(a) of the ITAA 1997). Therefore the providing of these shares will not be specifically excluded from the definition of fringe benefits under paragraph (h) of the definition in subsection 136(1) of the FBTAA.

As stated above, a fringe benefit will only arise under subsection 136(1) of the FBTAA where the benefit is provided by an employer to an employee or associate of the employee in respect of the employment of the employee.

Under the relevant plans, the benefit (beneficial interest in shares) that arises upon the end of the vesting period is considered to be provided as a result of the employee exercising rights (previously obtained upon acceptance to participate in the relevant plans).

The situation mentioned above is considered to be analogous to that stated in ATO Interpretative Decision ATO ID 2003/316 which refers to the case of FC of T v. McArdle 89 ATC 4051;(1988) 19 ATR 1901. In that case, an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The Court noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years.

In the present circumstances, when an employee accepts an offer to participate in the EPRP and/or EIP and/or Unlisted Options, he or she obtains a right to acquire a beneficial interest in a share in the Company and this right constitutes an ESS interest. When this right is subsequently exercised, any benefit received, that is, beneficial interest in shares, would be in respect of the exercise of the right, and not in respect of employment.

Therefore, the benefit that arises to an employee after the vesting period under the EPRP/EIP, being the beneficial interest in a share, does not give rise to a fringe benefit as no benefit has been provided to the employee 'in respect of' the employment relationship.

Question 7

Summary

The EST is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the EST in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997. As such, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the EST from being a fringe benefit.

Accordingly, the Company will not be required to pay fringe benefits tax in respect of the irretrievable cash contributions it makes to the Trustee of the EST to fund the acquisition of Company shares.

Detailed reasoning

Subsection 136(1) of the FBTAA defines a 'fringe benefit', in relation to an employee, as a benefit in respect of the employment of the employee, and paragraph (ha) of that definition excludes:

a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997);

An 'employee share trust' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by subsection 130-85(4) of the ITAA 1997.

Subsection 130-85(4) of the ITAA 1997 provides:

Meaning of employee share trust

130-85(4) an employee share trust, for an employee share scheme, is a trust whose sole activities are:

a) obtaining shares or rights in a company; and

b) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of:

(i) the company; or

(ii) a subsidiary of the company; and

a) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b).

The right to acquire a beneficial interest in an employer share is an ESS interest within the meaning of subsection 83A-10(1) of the ITAA 1997.

An employee share scheme is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment.

The scheme is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which rights to acquire beneficial interests in shares in the company are provided to employees in relation to the employee's employment.

Under the Company Equity Plans, the Company has also established the EST to acquire shares in the Company and to allocate those shares to participants. Therefore, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

· the EST acquires shares in the Company, and

· the EST ensures that the ESS interests, being the right to beneficial interests in those shares, are provided under an employee share scheme, to the employees in accordance with the Trust Deed and rules of the relevant Company Equity Plan.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will require that the Trustee undertake incidental activities that are a function of managing the plans and administering the trust. The incidental activities are covered by paragraph 130-85(4)(c) of ITAA 1997.

The EST is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997. As such, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the EST from being a fringe benefit.

Accordingly, the Company will not be required to pay FBT in respect of the irretrievable cash contributions it makes to the Trustee of the EST to fund the acquisition of Company shares in accordance with the Trust Deed.

Question 8

The benefits provided to the Trustee by way of irretrievable contributions to the EST, and to participants by way of the provision of Performance Rights, Unlisted Options and shares under the Company Equity Plans are excluded from the definition of a fringe benefit as explained in Questions 6 and 7. Therefore, as these benefits have been excluded from the definition of a fringe benefit and as there is also no FBT currently payable under the plans, the FBT liability is not any less than it would have been but for the arrangement.

Accordingly, the Commissioner will not make a determination that section 67 of the FBTAA applies to include an amount in the aggregate fringe benefits amount of the Company in relation to a tax benefit obtained under the scheme from irretrievable contributions made by the Company to the Trustee of the EST to fund the acquisition of Company shares under this scheme.